Tax Sale Property An Epidemic
When properties are taxed at outrageous rates, they can become worthless (even as a tax sale property) in a hurry!I
n a previous article, “Second Chance Tax Sales“, I briefly mentioned the irony of ANY property not selling at a county tax sale.
Any given property, you would think, should be taxed at some relatively small percentage of its actual market value each year. Voters in California pioneered the idea that homes should only be taxed at 1% of their value all the way back in 1978.
And Indiana recently passed a state constitutional amendment limited taxes on homestead properties to 1% of value or 2% for rentals. See the results for more information – it received over 78% approval by voters. Tax sale property should have been greatly reduced.
The Debate: What is an appropriate yearly tax burden to guarantee only a small percentage of value is owed at any tax sale: 1%? 5%? 10%?
Even if it were appropriate to tax a property at 10% of its value every year (preposterous in my opinion, by the way, and 10 times the rate of some areas), properties would have no more than 30-40% of their value accrued in taxes by the time a tax sale would be held.
In most states, much less would accrue before sale (most get the property to a sale before 3-4 years of delinquency piles up).
Even in today’s terrible market, investors line up to pay 30-40% of current market value for tax sale property sale. By definition, it’s “free money”.
Sure, some tax sale property is truly worthless, and yet might have to be assessed for SOMETHING. And so the county should eventually acquire those properties.
But many very useful properties are taxed the entire amount of their value in the span of just a few years are not worth what owed at the first tax sale held.
With over-taxation rampant, especially in low-income areas, this brings up a an interesting question:
Is it really possible to lose money on a properly-managed, free and clear tax sale property as a rental, where there is demand for rental housing?
One would hope that this couldn’t possibly be so, but unfortunately it is, at least for now.
The Sad Truth About Tax Sale Property Perpetuating Itself
Overtaxation is a vicious circle. Once taxes reach a point where cash flow cannot be obtained by renting free and clear properties, property values in that neighborhood get very close to zero.
A viable rental strategy can be to buy houses so cheap that they are disposable – in other words, you never pay the taxes on the property.
Rent it out unti it’s eventually becomes a tax sale property again. Between delays in holding tax sales, and waiting for subsequent “second chance” sales to be held, several years can go by where rent is collected. Yet with property taxes paid (the main expense in this property), and a tidy profit can be made.
This is also known as “milking the property”.
You can probably imagine the effects this kind of business model (which is forced upon landlords by overtaxation) can have on a city. See my recent post on Gary, Indiana.
Tax Sale Property Examples
Let’s look at some typical tax sale property in East Chicago, Indiana, or Gary, Indiana.
Both communities still have well-kept, though low-income, neighborhoods where rental demand is adequate.
Say you get your hands on a well-kept, clean property in Gary’s Horace Mann neighborhood for only $2000. It has a built-in renter getting 100% section 8 assistance. Sweet!
Section 8 pays $450 per month for the property, and the tenant is a pleasure. $5400 per year is direct-deposited into our account each and every month.
Just get some more tax sale property like this and we’ve doubled our social security benefits, right?
Let’s run the numbers:
1. Generally accepted operating expenses for property (includes vacancies and maintenance): 45% of income.
Never mind that in lower income examples, this figure is actually higher because renters are more transient (higher vacancies) and maintance is generally consistent on a property regardless of market value. Cost: $2430
2. Taxes: Taxes in Gary can run as high as $2000 for properties worth no more than $10,000 in reasonable, rentable shape. Cost: $2000 per year
3. Insurance: Insurance for properties in lower-income areas has exploded in cost the past few years. With the mortgage crisis, most low-income areas have a high number of vacant properties, and the opportunities for thugs to cause trouble (and insurance ) abound. Yearly insurance premium: $1000.
Rental income: $5400
Profit: $30 loss for well-managed, free and clear property.
This setup leaves an attractive, high-profit option for the entreprenuer (but potentially devastating for the community)…become a slumlord!
Note that $3000 of the expenses shown here don’t NEED to be paid for a landlord to receive the rent.
So it’s possible to pay $2000 for this tax sale property at a second chance tax sale. You could then turn around and earn almost $3000 per year while paying no county property taxes or insurance. This wave could be ridden for for 4-5 years or more before the property is lost again.
I hope you find the numbers I presented here (and the effect they will have on overtaxed communities) as outrageous as I do. The solution is to spend less and/or obtain city/school revenues from some other source than property taxes. The market will severerly punish any jurisdiction that doesn’t heed this warning, tax sale or not!
Get all kinds of tax sale property with no bidding or waiting – get my “Underground Tax Sale Strategies” guide below.
Profit From Tax Delinquent Property NOW!
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Sites That Link to this Post
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